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Dealing with Unpaid Invoices

itsettled - the automated credit management software - brings businesses the ultimate guide to dealing with unpaid invoices.

Welcome to the ultimate guide on unpaid invoices - brought to you by the credit management experts at itsettled. You’ll never need anything else.

How can unpaid invoices impact a business?

Let’s start by going over the impacts unpaid invoices can have on your business. It can be tempting to write off late payments, but in reality, they can leave a huge impression on you and your business. 

1. Poor relationships with customers

If you’re constantly getting paid late by certain customers, you can quickly become stressed and unhappy with your customer. That resentment will eventually lead to you taking it out on the customer if you don’t take action. Angry emails and calls will do nothing to resolve the situation, especially if they aren’t preceded by polite requests for payment. 

2. Poor cashflow

It’s obvious, but when you get paid late, you won’t have as much cash in your business bank account. This means you might not be able to pay your staff or yourself a wage, and if it gets really serious, it might even impact your business's future. 

3. Stress

Another obvious one, but unpaid invoices can cause you (as well as your staff) a lot of stress. Not knowing when your next injection of money will come can be really stressful, and impact your mental health hugely. For many business owners, their business finances can feel like your personal finances, so this financial stress can impact your own personal life too. This is a situation which you want to avoid at all costs. 

4. Ability to get finance/loans

If your cashflow position isn’t strong due to large amounts of outstanding invoices, you may be rejected for business finance or business loans. These loans can be useful if you are wanting to expand your business or offer new services or products. Business finance can be useful when you’re in a tight spot with your cashflow, so making sure your invoicing process is working is important. 

5. Stops further investment

In addition to the point above, unpaid invoices can lead to you not being able to invest further in your business. Unpaid invoices equals less cash, and less cash equals less money to drive your business forward. This money could go towards hiring new staff, investing in new technologies, expanding into new markets, or developing new services or products. 

How to chase unpaid invoices

We’ve covered how unpaid invoices can impact your business, but how do you go about chasing them in a way that maintains good relationships with your customers? 

1. Send a reminder before it’s due

If possible, it’s best practice to send a reminder of the invoice either the day or two days before the invoice is due. This can be especially helpful if you didn’t complete the work  recently, or if it's a one off invoice (opposed to a recurring one). You might worry that this is rude - but as long as the message is polite, no customer will think this is unnecessary when they receive it. Some customers might find it helpful, as it will remind them to pay if they’ve forgotten. 

2. Send a polite reminder the day after it’s due

If you don’t receive payment, it’s a good idea to send a polite reminder the day after the due date. Make sure you re-attach the invoice, as this will include details of your bank account so that your customer can pay you. 

3. Progress this with a call

If you are met with silence after the first two steps, it’s now time to make a call to your contact at the company. Simply ask them if they have any updates on your unpaid invoice, and if they need anything else from you in order to pay the outstanding invoice. If you don’t get an answer, use another contact at the company, or ask to speak to whoever is in charge of accounts. 

4. Learn the best responses for excuses to late payment

If your call ends with your customer providing excuses for late payment, make sure you’re prepared - you can read up on how to respond in our Excuses for Late Payment article. Whether it’s “we don’t have any money” or “we can’t pay you as we’re very busy”, we’ve got you covered.

5. Explain the consequences if the customer doesn’t pay

If the customer still doesn’t pay, then the next option is to explain the consequences for them. If you don’t already have a process for dealing with late payment or unpaid invoices, now is the time to create one. Decide if you want to charge any interest or fees on late payments, or when you want to approach legal action or a debt collection agency. 

6. Use itsettled

If you raise invoices at all (which we’re assuming you do if you’re reading this), then itsettled is a great solution. Our credit management software collects your invoices fast, reduces risk, and improves your cashflow. After syncing your accountancy software with our software, you simply upload your invoices and itsettled does the rest for you.     

How to prevent unpaid invoices

It’s all well and good telling you how to chase unpaid invoices, but what if there was a way to prevent them? We’re going to guide you through some of the actions you can take to prevent unpaid invoices in the future. 

1. Check invoices for mistakes

Before sending out an invoice, make sure that you have checked it for mistakes. Incorrect invoices are frequently used as an excuse for unpaid invoices, so nip this in the bud by ensuring your invoices have all the correct information, including the right bank details, address, and invoice number. 

2. Understand the legalities of invoice chasing

It’s a good idea to make sure you understand what you can legally do about unpaid invoices. There are certain steps that you have to take, and certain procedures you have to follow when taking legal action on unpaid invoices. Read more about this on the UK government website

3. Use consistent communication

When chasing invoices, we recommend using a consistent tone when communicating. If you start off very polite, but use an angry tone in your next email, you risk alienating your customer and upsetting them. It’s absolutely fine to escalate the tone, but make sure you do this gradually and within reason. Never use rude language.

4. Offer discounts for those who pay early

If you feel like it’s an affordable step, it can be a good idea to offer discounts on invoices for customers who pay early. It doesn’t have to be a large amount, but a small percentage can make it appealing to customers. Of course, this may not be suitable for all your customers, so think carefully about who to offer discounts too if you do decide to offer them. 

5. Use itsettled to chase unpaid invoices

You can prevent unpaid invoices ever becoming an issue by using an automated software like itsettled. Simply sync your accountancy software, upload your invoices, and itsettled will chase invoices for you. Try our full access free 7 day trial today.

Best Practice for Invoicing

We’ve covered how unpaid invoices can affect your business and how to chase and prevent late payers, now let’s discuss invoicing best practice.

1. Communicating your payment terms at the beginning of the contract

If you don’t have a set procedure in place for what your payment terms are, now is the perfect opportunity. You should also make sure that you communicate these terms to any new customer when you start working with them, and ensure that they understand what these terms mean. 

2. Invoice clarity

There’s no need to jam pack your invoices - you just need a few key pieces of information. It’s important that the key information is clear and easily understandable. Sage have put together this handy invoicing cheat sheet which has all the details you’ll need.

3. Send an email to confirm the customer has received the invoice

Once you’ve sent your invoice, we recommend emailing your customer a few days later to check it has been received and that they are happy with the information. This can prevent the excuse of ‘we didn’t receive the invoice’ that is unfortunately very common. This also provides the customer with an opportunity  to query the invoice if they were unhappy with anything before the due date, thus preventing any drawn out conversations post due date. 

4. Keep a clear paper trail

If you make a phone call to discuss the invoice, make sure that you take a note of any conversations you have with the customer, including who you spoke to, what time you spoke to them, and a brief overview of the conversation. This can be useful if you need to include any chasing information for a later date. 

5. Invoice on time

It sounds incredibly obvious, but make sure that you always send out your invoices before they’re due. If you’re sending invoices out late, you’re never going to be paid on time. Consider putting a reminder in your diary for when an invoice needs to be sent out if you often forget. 

Things to consider when invoicing

Lastly, let’s think about some considerations you need to make when invoicing. By thinking about these questions, you can develop better and more robust payment terms and policies. 

1. Could you charge a late payment fee?

This isn’t an option for everyone, but many business owners will charge a late payment fee, or interest, on any invoice that isn’t paid by the due date. The government says that the interest you can charge if another business is late paying for goods or a service is ‘statutory interest’ - this is 8% plus the Bank of England base rate for business to business transactions.

2. Credit check your new customers

When you bring a new customer onboard, think about credit checking them first. This might sound extreme, but it’s better to be safe than sorry. You don’t have to dismiss them as a customer if their credit report is bad - but you might want to set stricter payment terms or keep an eye on their payments more closely. itsettled offers free credit checks and credit reports to all its customers. 

3. Consider the Prompt Payment Code

The Prompt Payment Code was introduced by the UK Government in December 2008 and is a voluntary code of practices for businesses. When signing the code, businesses undertake three key responsibilities; 

  1. To pay suppliers on time, within agreed terms. 
  2. To give clear guidance to suppliers on terms, dispute resolution and prompt notification of late payment.
  3. To support good practice throughout their supply chain by encouraging adoption of the Code.

The Prompt Payment Code is run out of the Office of the Small Business Commissioner. 

4. Consider payment plans, and make sure you have clear terms for these

When approached for payment, some businesses may ask you if they can have a payment plan put in place. It’s wise to carefully consider how you will set out your payment plans, and what the consequences will be if instalments are not made on them. Read the free itsettled guide to Payment Plans to discover how they work and whether they are a good fit for your business. 

5. Schedule reminders to yourself to chase, or keep records of when large payments are due

Running a business can be exhausting, and you can often feel like your to-do list is never-ending. If you’re regularly forgetting to chase invoices, it might be a good idea to schedule reminders in your phone or diary. Alternatively, use an automated credit management software that will chase your invoices for you, such as itsettled. 

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